Tag: invisible hand

Economists are confusing. They often disagree about the most basic of ideas. But one thing no serious economist rejects is the important role of self-interest in promoting economic growth.

In fact, this idea has been a mainstay of economic theory for centuries. “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner,” wrote Adam Smith in 1776, “but from their regard for their own interest.”

Today, the importance of self-interest is all but taken for granted. Schools use grades to encourage students to learn. Employers offer bonuses for high-performing employees. Governments offer tax credit for environmentally friendly choices. Today, doubting self-interest’s role as a catalyst for economic growth is almost unheard of.

But unfortunately, pursuing self-interest can go too far.

In the introduction to his book “Economics as Religion,” Robert H. Nelson defines two types of self-interest. “Legitimate” self-interest, he says, is expressed through market processes: as people seek their own benefit, they produce and exchange in conjunction with others in order to build wealth. This is the same kind of self-interest Adam Smith described.

“Illegitimate” self-interest, on the other hand, is expressed in the form of deceit, coercion and violence—seeking their own benefit, people enrich themselves at the expense of those around them. This type of self-interest is usually condemned, and often illegal.

But while illegitimate self-interest may be rare in the United States on a large scale, this is not the case in many parts of the world. Political violence is common in east Africa. Government transparency is deficient in communist China. Police corruption is rampant in places like Sudan, Mexico and Afghanistan.

Americans often analyze these disadvantaged nations and blame certain public figures or features of regional economies like the presence of oil, drugs or famines. But what we often forget is that the same drive for success that fuels our own economic success creates economic disaster when unaccompanied by strong moral values.

This is because self-interest is the most powerful force in the world. It fuels profit-making and charitable enterprises alike. It drives technological progress and entrepreneurial innovation. Yet without strong social pressure to restrain self-interest, economic mayhem results—regardless of financial conditions. As Nelson shows, the nation of Zambia was for years one of the largest recipients of foreign aid in Africa, yet the Zambian economy actually worsened during this same period. Much of this aid, he argues, went straight into the hands of oppressive political rulers who used it to serve their own ends without regard for the rights of their countrymen.

What Zambia lacked was a social system that upheld the values required for economic growth—values that encourage self-interest in the market yet condemn it as a way to harm others. Until these values exist, no amount of investment or aid will do any good. Self-interest will rule, as it always does, but only through the violence of those whose self-interest overcomes their respect for the rights of those around them.

Self-interest is the fount of economic growth. It is the catalyst for innovation and production. But it can also be the prime mover behind violence and corruption. Needless to say, values and capitalism go hand in hand. If either is left without the other, the economic blessings of self-interest will never be known.

You’d think that downed traffic lights would cause chaos, confusion and road rage on steroids. Aren’t human beings too greedy and self-serving to be allowed to drive without traffic lights at even the smallest of intersections?

But my experience in the aftermath of a terrible storm last weekend proved that selfish human beings are far more capable of cooperation than critics give them credit for.

I live about 20 miles west of Washington, D.C. For those of you who don’t know, that means I witnessed a nasty storm last Friday night—one that left hundreds of thousands in the region without power.

Included among the power outages were hundreds of local traffic lights. As I drove around this weekend looking for air-conditioned stores, I made my way through dozens of busy intersections with no lights, signs or police to direct the heavy traffic.

While such a scenario sounds daunting, I was pleasantly surprised by what I saw. D.C. drivers are usually known for being overly aggressive. But the unusual circumstances had everyone driving more slowly and carefully. When drivers came to a downed traffic light, they all stopped to allow the earliest arriver to go first. Drivers were waving, directing and nodding to each other to make their intentions known and ensure they did not get hit. All of this only due to their own selfish desire to avoid pain and loss of property—to stay as far away from other cars as possible.

It really was a remarkable sight, and one I did not expect to see. But why do I write about this here?

Because while social cooperation without coercion is a natural part of day-to-day life, many seem to forget this is possible when formulating economic policy.

From the time we are children, we are taught that we need certain laws and regulations (like traffic lights) to protect us from each other. Without them, we are told, nothing would ever get done—human beings are simply too self-serving to be able to function without these expansive and sometimes cumbersome regulations.

But in the same way that D.C. drivers this weekend did not all die while racing through broken traffic lights, individuals in a free economy—seeking their own self-interest—engage in social cooperation without coercion that makes everybody happier.

Adam Smith famously illustrated this with the “invisible hand” analogy. “It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own interest.”

It is a basic principle, and one that even the most cursory review of basic economics will make clear. In the same way that seeking one’s own safety on the roads means indirectly seeking the safety of other drivers, seeking one’s own self-interest as an economic agent brings benefit to all.

Many in power seem to forget this, however. Even where there are no problems, many policymakers propose regulation that they allege will prevent possible problems that may arise in the future. And even where voluntary cooperation has worked for centuries—like creating money or providing for the poor—government intervenes and regulates, claiming that without their supervision everything would fall apart.

But human beings are not so evil. Yes, they are selfish—but it is precisely this that ensures a level of social cooperation. As each seeks his own preservation, he empowers his neighbor to do the same.

Even during a time as chaotic as the aftermath of a terrible storm, the invisible hand works wonders. Self-interest—this time in the form of avoiding pain and property damage—ensured social cooperation on the roads and spontaneous order undirected by any coercive agent.